Jury verdict finding Microsoft’s product activation systems infringed two patents affirmedNovember 19, 2007

In a decision Friday, the Federal Circuit affirmed a district court's finding of infringement and no invalidity of patents relating to the reduction of software piracy. At issue was a finding of non-infringement based on the claim construction of claim limitations found in patents held by z4 Technologies. In affirming the district court decision, the court found that a reasonable juror could find that Microsoft infringed the contested claims notwithstanding the court's modification of the district court's construction of one of the claim limitations. The court refused a remand to recalculate damages based on the Supreme Court's recent decision in Microsoft v. AT&T, finding that Microsoft had not presented any evidence that some of the infringment was under § 271(f). As a result, the court affirmed the jury's finding of willful infringement of the asserted claims, and the concomitant damages award of $115 million against Microsoft, plus attorney's fees and $25 million in enhanced damages for willful infringement and litigation misconduct. More details of z4 Techs., Inc. v. Microsoft Corp. after the jump,

The plaintiff, z4 Technologies, is the assignee of two patents relating to the reduction of software piracy. Specifically, the z4 patents utilize a multi-step authorization scheme involving an initial password entered by the user allowing for a grace period for a fixed number of uses or period time. Prior to or following the expiration of this grace period users submit registration information to a representative of the software developer to gain access to a second password which allows the user to enable the product for use beyond the grace period. Users are also able to choose between a manual registration mode and automatic or electronic registration mode.The accused product, Microsoft's "Product Activation" feature of its Office and Windows products, utilizes a "Product Key" and a grace period to prevent software piracy. z4 sued Microsoft and Autodesk for infringing claim 32 of the '471 patent and claims 44 and 131 of the '825 patent. Autodesk settled while the appeal was pending. Claim 32 of the '471 patent reads as follows (emphasis added):

32. A computer readable storage medium having data stored therein representing software executable by a computer, the software including instructions to reduce use of the software by unauthorized users, the storage medium comprising: instructions for requiring a password associated with the software; instructions for enabling the software after the password has been communicated to the software; instructions for subsequently requiring a new password to be communicated to the software for continued operation of the software; and instructions for automatically contacting an authorized representative of the software to communicate registration information and obtaining authorization for continued operation of the software.

Claims 44 and 131 were treated the same for purposes of the appeal. Claim 44 reads:

44. A method for reducing unauthorized software use, the method comprising: providing a representative to monitor software license compliance; associating a first authorization code with the software, the first authorization code enabling the software on a computer for use by a user for an initial authorization period, the initial authorization period being based on usage of the software; supplying the first authorization code with the software; requiring the user to enter the first authorization code to at least partially enable the software on the computer for use by the user during the initial authorization period; requiring the user to contact the representative for retrieval of at least one additional authorization code to repeat the enablement of the software on the computer for use by the user during a subsequent authorization period beyond the initial authorization period and allowing the repeat of the enablement of the software to be performed prior to the expiration of the initial authorization period so the enablement of the software can be continuous from the initial authorization period to the subsequent authorization period, the software being enabled on the computer for use by the user during the subsequent authorization period beyond the initial authorization period requiring without further communication with the representative following entry of the at least one additional authorization code; requiring the user to selectively choose either manual or electronic registration and provide registration information to the representative prior to retrieval of the at least one additional authorization code, the registration information including computer specific information; comparing previously stored registration information related to at least one of the software, the user, and the computer with the registration information provided by the user to the representative to determine if the user is an authorized or an unauthorized user; and at least partially disabling, the software if the user [sic] an unauthorized user.

After a jury trial, Microsoft was found to have willfully infringed the two patents, and awarded z4 $115 million in damages. The district court enhanced this award by $25 million plus z4's attorney fees based on the finding of willful infringement plus the court's determination of Microsoft's litigation misconduct (not producing a particularly damaging document until the eve of trial, and then only after its existence was discovered in a deposition).On appeal, Microsoft argued that the district court erred in the construction of the terms: "user," "automatically," "password," "electronic," and "authorization code." Microsoft also argued that district court erred in denying its JMOL of invalidity under 35 U.S.C. § 102(g) based on technology that Microsoft claimed constituted prior invention sufficient to invalidate the asserted claims.In addressing district court's claim construction, the Federal Circuit agreed with Microsoft that the district court erred in construing "user" to include a computer or computers apart from a person. The proper construction, according to the court, is "a person or persons using a computer." Microsoft contended that this construction would require the authorization of a particular user rather than their device which required the authorization of a particular computer. However, the court found Microsoft's contentions to be "artificial and inconsequential," and that the argument ignored the language of the claims which permits the identification of authorized users based on computer-specific information.The Federal Circuit went on to affirm the district court's construction of the remaining terms. Microsoft argued that its Product Key was not an "authorization code" or "password" because it is not "associated with the software" as required by the claims. The court disagreed, as one of Microsoft's own witness admitted that "unless users enabled the grace period using this specific Product Key, they would have been unable to complete the Product Activation Process." It was undisputed that the Microsoft "Product Activation" was like the claimed invention in that it required "dual authorization codes and that the Product Key enables only a limited grace period."The court also agreed with the district court's finding that the Licensing Verification Program on Microsoft's BP 98 software did not anticipate the asserted claims under § 102(g) and that the denial of JMOL was appropriate. Specifically, the court found "that the anti-piracy feature of BP 98 did not work even to reduce piracy." The court highlighted evidence showing that Microsoft did not know of its products "effectiveness" and that Microsoft "[could] only measure [effectiv

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